MZUMBE UNIVERSITY SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING AND FINANCE NAME: EINOTH .G.JOHN REG: 9649/T.09 COURSE: Bacc.LGAF III SUBJECT: ACC 391 DATE: 5th JUNE, 2012QUESTION ONE(a)Discuss the applicability of provisions under the various statutes in Tanzania for investmentincentives.(b) Discuss the arguments for against investment incentives in TanzaniaQUESTION TWODiscuss the rationale behind international double taxation relief and agreement.
INTRODUCTIONINCENTIVES OFFERED BY TANZANIATanzania offers a variety of incentives. According to Tanzania Investment Centre (TIC, 1998),the incentives have been devised to compensate and reward investors for their entrepreneurship;to match the changing needs of the country; to channel investments in the direction most need foreconomic development and to ensure growth with social equity.Section 19 and 20 of the Tanzania Investment Act 1997 referred above does not categoricallymention the types of incentives offered by the country. These are more clearly mentioned inInvestor’ Guide to Tanzania 1998, which is published by the TIC. The incentives mentioned inthe Investors’ Guide to Tanzania 1998 (pp. 14-19) are mainly various tax rates for differentsectors. For example the mining sector and export processing zones, have a 0% tax rate on thefollowing ; custom duty on capital goods, sales tax on capital goods and withholding tax oninterest.QUALIFYING BUSINESS IN TANZANIAIncentives in Tanzania are granted to holders of Certificate of Incentives issued by TIC .Otherapproved investors too are eligible. The qualifying threshold for foreign investors is US$300,000 , down from US$ 500,000 in 1996. Local investors face a threshold of US$ 100, 000.Investment in rehabilitation should exceed US$ 250,000 for foreign investors (and jointventures) and US$50,000 for local investors.DEFINITION OF KEY TERMSTax incentivesTax incentives can mean many things. It can mean tax reduction intended to encourage businessoperations, Foreign Direct Investment being one of them. They are special provisions intended toencourage certain kinds of behaviour in response to tax benefits. It can also mean any taxprovision which include certain behaviour because, objectively and irrespective of the originalrationale of the provisions this behaviour has more favourable tax consequences than thealternative forms of conduct.
Types of Tax IncentivesTax incentives are of many types, some of which are as follows. Tax holidays, Investmentallowances and tax credits, Investment credit is tied directly to fixed investments. Timingdifferences and General tax reductions.INVESTMENT INCENTIVES:These are the benefits offered by host economies to foreign investors so as, combined with otherForeign Direct Investment determinants, may help to attract more Foreign Direct Investment sand/or retain those already present in a country.Double Taxation: Phenomenon whereby the same income is taxed in two or more taxjurisdictions. In the same year of income; By the same tax payer.International Double Taxation relief: Refers to International tax relief granted through taxationagreement negotiated between Tanzania and other countries. (being international calls for a needof cooperation between these countries in granting relief).Incentives under TIA 1997.a) A holders of certificate of investments are entitled under 3rd schedule no.2 of TIA 100% deduction of capital expenditure incurred in the year of income and preferential withholding tax rates on dividend and interest on loans for both resident and non resident person carrying on business on priority sectors (dividend 10%; interest 0).b) Assistance from TIC in processing statutory licenses, registration, permits and approvals and other clearances.c) Guarantees on remittances of profits, dividends and others against nationalization without proper compensation.Incentives under ITA (as revised), 2008a) Full deduction of agriculture, research, development and environment expenditures.b) Depreciation allowances for depreciable assets under 3rd schedule of the ITA, 2008 (s.17).
c) Full deduction of losses on realization of business assets and liabilities (s.18).a) Unrelieved loss from any business or investments for any year of income may offset againstprofits of the current year of income or against other businesses or investments (s.19).b) Full deduction of expenditure incurred in clearing land and planting thereon permanent crops.Incentives under VAT (as revised), 2006a) Exports of goods or services are zero rated.b) Essential or basic goods are exempted like agricultural inputs, health supplies and the like.c) Special relieves for specific individuals like importation under technical aid agreements,importation of mining equipment.QUESTION ONEa) The applicability of provisions under the various statutes in Tanzania for investmentincentives. Today agricultural investors in Tanzania are enjoying 100% capital allowance as per 3rd schedule of the ITA (as revised), 2008.For example in cotton production in Mwanza and shinyanga, Cashew nuts in Mtwara, Coffee production in Bukoba and Arusha; on the other side capital allowances has stimulated the Japanese and Chinese to invest in rice production in some areas like the Arusha municipal and some parts of the morogoro mainly at Kilosa. They have stimulated developed in some priority geographical areas. The Export Processing Zone which was established by the Act no 11 of 2012 has encouraged development of some small industries like Quality Foam Limited, and Dodoma Wine industry in Dodoma. It has stimulated development in communication networks in the country. Through tax relief network provider are given tax holidays for the first five (5) year after their
establishment in Tanzania. For example Vodacom, Airtel, Tigo, radio stations and television broadcasting.(b) Discuss the arguments for and against investment incentives in TanzaniaThe argument for investment incentives in Tanzania. They have encouraged rapid economic growth: The fiscal and tax incentives are necessary in achieving rapid economic development which is the major concern of all countries, the resultant effect of this concern is the regional economic groupings, trade liberalization among nations and formulation of competitive investment incentives. They are major factors in decision making: Tax incentives are considered to be major factor in the investment decision process as a result it is necessary to review fiscal and tax legislation to see to what extent investments are either encouraged or discouraged by taxation. Tax incentives are necessary to speed up the level of investment by maximizing the profit after tax; high tax rate lower the profit of the investment and hence discourage the investors at a respective country and Tanzania in particular. By providing tax incentives the investors will be encouraged to invest in the priority areas such as Dodoma, Rufiji, Mererani, Bagamoyo, Tanga Port and other among many in Tanzania. Grating tax incentives act like a bonus which eventually increases the level of the retained earning to the investors. This is among the approaches taken by countries to attract more Domestic and Foreign Direct Investment includes a general improvement in the investment/Business environments in these countries. Tax incentives granted in Tanzania are clearly provided in the 3rd schedule of the ITA (as revised), 2008. On top of these incentives come three types of wear and tear deductions allowed by Tanzania. Tractors, combines, and self-propelled heavy equipment qualify for class 1 deduction and earn a 37.5% annual deduction. Light self-propelled equipment is entitled to a class 2 deduction of 25% annually. Class 3 deductions amount to 12.5% annually on office furniture and Class 8 deduction of 100% annually on agricultural plant and machines. Investment incentives accelerates establishment of new enterprises and hence creates employment opportunities in the respective country as Tanzania is concerned. This can
be stimulated by tax holidays probably the most known and widespread tax incentive is tax holidays. These are mainly targeted to new firms and may not be available to existing operations. They are more linked to the establishment of enterprises than to the level of investment. New firms are allowed a period of time after some initial point when they are relieved from the burden of income taxation. The period can be extended to a subsequent period of taxation at a reduced rate of tax. Businesses can start enjoying tax holidays at different times of investments’ life. It can be when the production starts; the first year of profit; first year of firms’ positive cumulative profit on its operations. For large projects with huge start-up costs, tax holidays, which start, when production occurs may actually increase the tax paid over the life of the project. Therefore, tax holidays may occur when no taxes would have been paid in any event and taxes may be increased following the holiday because no losses are available to offset the profits. Firms and projects which make substantial profits in the early years of operation potentially enjoy tax holidays. These include the trade sector, and short-term construction or service sector in real estate; restaurants; hotels and short-term market exploitation firms.The argument against investment incentives in Tanzania. On the Investment allowances and tax credits this type of tax incentive presents some problems. It is difficulty to define the eligible expenditures and to choose the rate of allowance or credit. It is also a problem to set a restriction on their use. This is of little benefits for the quick profit types of firms, which can take best advantage on tax holidays. Tax allowances are of greatest benefit for firms within income from existing operations. Firms with low income or start-up firms cannot begin to take advantage of the incentive until income is earned. Investment allowance is usually made in the year of acquisition or the first year of use of an asset. It does not reduce the basis for write-off in later years. It is common in connection with different kinds of capital expenditure, particularly in respect to industrial undertakings. It reduces the taxable income. On the taxholday’s incentives among the problems that this incentive present is that it can be used to shelter income ( from existing domestic operations) from taxation through
transfer pricing and the transfer of operations from existing firms to new ones that qualify for the holidays and major capital intensive projects are not likely to benefit from this incentive, as they do not normally make profits in the early years of operation. For tax holidays, revenue impact is tied to the degree of new activity. Therefore revenue impact is relatively low in the early years of the program and grows over time as more firms become eligible. Loss of government revenues. Tax is the major source of the government revenues as a result Investment incentives creates some possibility of tax avoidance hence reduces government revenues this can be viewed as discussed above through tax exemptions, tax holiday’s and any other allowable deduction under the various provision on the ITA (as revised), 2008, TIA 1997, VAT (as revised) 2006.A good example is a change in ownership which makes the new one gain a revised tax holiday’s from the outgoing ownership of the respective firm in the country as Tanzania is concerned.QUESTION TWOThe rationale behind international double taxation relief and agreement. To encourage free flow of resources, investment, trade and encourage capital formation. The double taxation treaties are intended to allow cooperation in training and tax administration to promote free flow of capital, free flow of technology and free flow of skilled technical personnel that promotes formulation of competitive investment incentive packages in order to attract both local and foreign capital. To reduce possibility of tax avoidance and evasion. With many taxes investors are discouraged in the whole course of paying taxes as a result they practice and use the available techniques whereby one so arranges his business affairs such that he pays little or no tax at all but without contravention of the tax law which eventually lower government revenues. To certainty for tax payers and tax authorities in their international dealings. A country avoids administrative difficulties that arise in through taxation of the international
dealings where on the other side for the local people or local investors sometimes may feel that they are discriminated against foreigners. To reduce socially financial hardship that lead to lower disposable income. Double taxation relief enhance international co-operation which is crucial importance in order to achieve rapid economic and social development where by establishing bilateral and multilateral regional economic groupings to promote trade and investment like COMESA, SADC, EAC. To protect investors from multiple taxes or double taxation that is aimed to give relief by the way of exemption, credit and setoffs for tax suffered on income originating in these countries.
BIBLIOGRAPHYBergsman, J. (1999) Advice on Taxation and Tax Incentives for Foreign Direct Investment.Price Waterhouse Coopers (1999). Tanzania Investor Road Map. Dar-es-salaam.Tanzania Investment Act, 1997.Tanzania Investment Centre (1998). Investors’ Guide to Tanzania. Printing Colour Print (Ltd),Dar-es-salaam.